Good Debt vs. Bad Debt

Payday advance

Bad debt

Aside from credit card debt, payday advance debt is about the worst type of debt out there. Payday-advance business operate in small retail locations and simply require patrons to have a checking account and proof of employment to borrow up to $300. This is a very easy and convenient way to borrow money, but if you read the contract, you’ll find that there can be interest charges of up to 17% per week, which can add up to a huge yearly sum.

This type of debt should be only considered if you have no place else to turn. Most often, you've already made several credit mistakes if you don’t have a credit card or access to a short-term bank loan.

Student loan debt

Good debt

It comes as no surprise that student loan debt is good debt — and there is a good reason to incur this debt, which is a college education. After you earn your degree, the expected income stream is high and the debt can be paid off.

There are some circumstances in which student debt can be bad, such as when the earned degree (from an expensive school) yields a job in a low-paying industry. Some former students struggle for years in this situation while they spin their wheels in a low-paying job trying to catch a big break.

Borrowing from your 401(k)

Bad debt

Any financial planner will tell you not to borrow from your 401(k) plan or IRA. In fact, these plans should be one of the last places to get money. Borrowing from your retirement plan involves jumping through hoops with your employer as well as dealing with IRS regulations. Not to mention the high penalties you’ll pay.

Using your retirement plan for a quick infusion of cash should be a last resort because this is your retirement money, not short-term savings money. Tapping family and friends could be a wiser move if you plan to pay them back on time and with interest. Having an emergency fund will enable you to avoid this situation altogether.

the good, the bad and the debt

Any time is a good time to take a look at your debt load, but it’s especially important when the economy is unstable. A good place to start is to make a list of your good debt and bad debt.

If you find that you only have good debt, you should figure out how to keep it that way. If you have bad debt, you need to figure out how and why it happened and what you plan to do about it. Having no debt at all says something as well. Perhaps you are great at paying off credit cards, but still rent an apartment or don’t have a college degree.

Overall, ridding our financial lives of bad debt is always a good thing. Adding some good debt might not be so bad, either — it could even be great for your future.